>BHEL LIMITED: a healthy order book of At the end of Q2 FY12, of INR 1,61000 crores

■ In a sweet spot due to structural deficit

Power sector plays a crucial role in the economic progress of the country given the importance of electricity in the economic activity. Currently, at the end of August 2011, the power generation capacity stood at 176,990.40 MW including the renewable energy sources such as wind, solar etc. However the country faces a peak power shortage of 13 percent as rising demand from industry, homes and shopping malls outstrips capacity growth. The energy-hungry nation needs to add over 75,000 megawatts in the five years to March 2017 to support its target of 9 percent GDP growth

■ Mammoth orders in book

Though the order inflow is muted during the year under review, BHEL has an outstanding order book of Rs. 1, 61,000 Crore as on September 2011, which comes at 3.30 times FY12E revenue, gives a clear revenue visibility for the next three years, coupled with strong execution capabilities. The company is also looking to get into agreements with many State Governments and other organizations which clearly signify the company‟s prospect for the next 3-4 years.

■ Minimal debt and cash rich company

Bhel is a low leveraged company having only 1% debt in the total financing coupled with a huge cash reserve of Rs.9000 crore, with which the company could withstand the effects of higher interest rate prevailing in the economy and finance the projects with much ease

■ Outlook and Valuations: Attractive; Initiate Coverage with ‘BUY’

Our DCF model with 15.3% discount rate values the company at Rs.400 per share giving an upside of 53.8% from the current level of Rs.260. We initiate coverage with a „BUY‟ recommendation for a target price of Rs.400. Those with a moderate to aggressive risk appetite can consider investing in BHEL at current level.

■ Risks

At the macro level, the current global economic scenario presents the most highly risk factor as any fall of the global economy into a double-dip recession can lead to a slower growth in our economy. Apart from that, the other concerns include the possibility for unusual further surge in the prices of commodities such as copper and steel, competition from the overseas players, persistence of the higher interest rate and higher coal prices causing delaying of projects etc. We expect all these concerns to ease in the medium term, which would otherwise impact the prospects of the company.

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RISH TRADER